With equity crowdfunding now legalised by the Jumpstart Our Business Startup (JOBS Act of 2012), there are fears that Venture Capital s (VCs) could be at the receiving end of creative destruction. Alternatively, it is also believed that equity crowdfunding won’t affect VCs and that the position of good VCs will remain unaffected regardless of equity crowdfunding. The bill will come into effect once U.S. Securities and Exchange Commission frames regulation for the equity crowdfunding industry. This article answers some key questions related to the Equity Crowdfunding-VC tussle and how Venture Capitalism may evolve with the coming up of equity crowdfunding.
Will the existing VC-backed business switch to equity crowdfunding?
Entrepreneurs cannot raise more $1 million through equity crowdfunding. And, even if an existing VC-backed business wants to tap close to less than $1 million, VC may still win over equity crowdfunding as it will be more manageable to handle a few investors than a large number of small ones.
What are the additional benefits that Venture Capitalist apart from providing capital?
Due to their prior experience of dealing with start-ups, the VCs have ties with prospective customers and suppliers which equity crowdfunding can never provide. VCs associations with investment bankers can come into play if the company wants to go public. In short, the VCs bring more than just the capital, they bring mentoring and experience. The online funding platforms are only limited to providing funds.
Can Venture Capitalists and Equity Crowdfunding mutually co-exist?
Yes, it is likely that they’ll share a complementary rather than a competitive relationship. Venture Capitalists can look for the good deals on the crowdfunding sites. In other words, the businesses with high growth potential may opt for funding from VCs whereas the companies with less growth potential can raise the money through equity crowdfunding. In a first of its kind event, a Venture Capitalist – Foundry group committed $2.5 million to AngelList investment platform an equity crowdfunding platform. In the coming days, we could witness more such deals in the crowdfunding space.
Which form of funding could is relatively less demanding and stable than the other?
Most of the VCs take more time than anticipated to provide initial funding. VCs in general will question more and spend more time before putting their money on a business idea. At times, a business may need more money to make the most out of an opportunity and a delay may not be a favourable situation. However, in a state where the entrepreneur and the Venture Capital share a good and trustworthy relationship, the Venture Capitalist would not hesitate to pump in more money to keep the business running.